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Growing pains: Company finds that success is not all about revenue

Photo by LARRY PEPLIN
"We'll consolidate, make sure everything is strong and then hit back again," Mike Chaudary, who co-owns DMC Consultants with his wife, Darshita, said of plans for the Detroit-based construction company after its biggest revenue year yielded no profits.

DMC Consultants Inc. had done all the right things. From its start in 2005, the Detroit-based construction company has been a darling of the small-business awards circuit. It has made the Inc. 5000 list four times, the Inner City 100 twice and Michigan 50 Companies to Watch once.

Then last year, DMC Consultants ran into trouble. The company enjoyed its biggest revenue year — growing to $8.6 million from $800,000 in 2007 — but didn't actually make a profit. It was just growing for the sake of growth.

"We lost money last year," said Mike Chaudhary, who co-owns the business with his wife, Darshita. "I said, 'I'm not going to pick up projects just to build up my revenue.' "

That's not unusual for second-stage companies, which struggle with how fast to grow and when to brake. Growth often needs to be focused on operations and performance rather than singularly on revenue expansion, said Dave Haviland, CEO of Phimation, a second-stage consultancy in Ann Arbor.

"Sometimes people feel like they have to apologize for not growing revenue," he said. "Going from $8 million to $15 million is very different than going from $4 million to $8 million. To have that kind of continuous growth is one of the myths that are worth debunking."

Changing course

For DMC Consultants, the source of its growth was also the source of its problem: diversification.

DMC diversified early, as most experts would recommend, gaining experience and opportunities in new areas.

But then it rushed headlong into all of those new opportunities, overstretching the company's resources.

"We were just trying to grow for volume," said Darshita Chaudhary.

DMC initially started as a consultant to other construction companies seeking federal certifications as woman-, minority- and veteran-owned businesses. Mike Chaudhary had experience obtaining those certifications — which can lead to lucrative federal contracts — for previous employers, so he thought a consultancy in that was smart.

It didn't happen quite as planned. DMC's first job was painting a friend's deck.

More significant work came in the first year from Detroit's planning and development office, which knew Chaudhary from his past work with other employers. Then the department began sending federally funded residential rehabilitation projects his way.

So DMC concentrated on building its residential rehab business rather than just the consultancy business. Diversification began in earnest in 2007 as DMC broadened its residential rehab work into other metro Detroit municipalities while also moving into lead removal, abatement and demolition.

It went through the financial rigors required for getting into bonded work on large-scale projects, such as housing complexes and government buildings. DMC's big break came in 2009 when it worked on 38 units of the Diggs/Forest Park Place townhouses on West Canfield Street for the Detroit Housing Commission.

After that, the Chaudharys could embark on million-dollar projects, such as replacing about 600 windows in Dearborn High School. They also started demolition projects and have torn down about 450 properties in Detroit in the past few years.

"We were comfortable in terms of our cash flow, in terms of our manpower and project management — everything," said Mike Chaudhary, 44.

By 2012, the company had doubled to 22 direct employees, including two project managers, and looked to add construction to its portfolio of services.

The Chaudharys saw only that rosy picture but soon found out that behind the scenes, things weren't working. Mike received a call from a client concerned about the status of a big project — and he didn't even know it was a problem. DMC's two project managers had been reporting that everything was on budget and on schedule.

By the time Chaudhary learned of troubles, the company already was behind. It did land the projects on time but ate a bunch of costs to make that happen.

"We went on trust that everything was working fine," Mike Chaudhary said. "We had to speed up production and lost financially on the projects."

DMC had to stop and take a breath, even though it would mean a decline in revenue. This year, it expects $7 million — down $1.2 million from last year — and it has dropped its employee count to 12.

"Now we are going with a budget, and we are budgeting for every project," Chaudhary said. "A lot of companies do it or have been doing it. We did not do it, so this has been a lesson for us."

Still, this doesn't mean DMC isn't planning for growth. The Chaudharys intend to spend 2014 rebuilding and improving so they can spread beyond Michigan in 2015. In the meantime, they are hiring consultants to oversee human resource, legal and accounting operations and overhauling the in-house accounting software system.

Lessons learned

Chaudhary said the biggest lesson he learned was how to select upper-level people. His project managers were hired with a basic interview and a recommendation. "I hired on my gut feeling," he said, "and I was wrong."

At workshops held by the Initiativefor a Competitive Inner City, a Roxbury, Mass.-based nonprofit that does work in Detroit, Chaudhary heard another business owner say he takes more than a year to hire senior people. Before extending an offer, he gets to know candidates slowly and personally.

Chaudhary said he will take more time in hiring, especially for senior project managers and vice presidents.

"When a second-stage company is trying to hire — we don't have any family who can come in, or relatives — you are dependent on hiring somebody from the market," he said. "I don't take on a large commercial project until I've identified a strong team member in the company."

That makes sense to Phimation's Haviland. Mistakes get costlier to fix the larger the company, he said, so there's nothing wrong with addressing them early, even if it means dialing down things a notch.

Whether anything could have been done to avoid trouble is less clear. The question for any owner of a growth-oriented business is whether to spend time and money setting the table for growth that may or may not come, or use those resources to go after customers.

If DMC Consultants had spent all its time working on its purchase-order systems and hiring practices, it wouldn't have had the money to earn new business.

"If we did that at that time, it would have increased expenses," said Darshita Chaudhary, 43.

It is the responsibility of business owners to choose the right mix of preparation and risk for their situation and goals. "It's different for every company," Haviland said. "On one hand, you don't want to overdesign it. But on the other hand, you need to know where your weak spots are."

Haviland recommended talking with experienced businesspeople when going through a situation like DMC's, and that's what DMC is doing. Consultants, the company's CPA, colleagues and Initiative for a Competitive Inner City workshops have been sources of good advice, Mike Chaudhary said.

"We'll consolidate, make sure everything is strong and then hit back again," he said.